Creating a new normal…

The Indian markets have been scaling new highs with NIFTY remaining above 10,000 for over a month. The current rally in Indian market is fuelled by strong liquidity from domestic investors. As strong inflows continue into domestic mutual funds reforms initiated by the Modi-led government reaffirm the faith of foreign investors ( as evident from a rating upgrade from Moody’s) in the India growth story which could well stay for another 7 years.

Domestic mutual funds continue to attract flows from investors with assets under management (AUM) of the industry increasing by Rs.51,148 cr in October to touch a new high of Rs.21.41 lakh cr. As per data from the Association of Mutual funds of India (AMFI), equity-oriented mutual funds (including arbitrage funds), balanced funds and equity linked savings scheme (ELSS) funds saw net inflows of Rs. 21,900 cr in October. In September, these funds saw inflows of Rs.27,077 cr. For the first seven months of the current financial year, cumulative inflows into these funds have tripled to Rs.1.51 lakh cr as compared to Rs.46,840 cr in the same period of the previous year.

Foreign institutional investors (FIIs) who took a break from buying Indian shares in August and September are returning after recent government announcements such as the Rs.2.11 lakh cr PSU bank recapitalization plan. Over October and November so far, FIIs have invested a net of $1.9 bn in Indian equities. US-based Moody’s on 17th November upgraded India’s sovereign credit rating by a notch to ‘Baa2’ with a stable outlook citing improved growth prospects driven by economic and institutional reforms. This is expected to further boost FII investments into India. For the year to date, they are buyers to the tune of $7.4 bn.

September quarter results for most companies have already been declared & results have largely been in line with expectations. After its muted performance in the June quarter due to the transition to GST, India Inc is getting back on track going by the September quarter results. Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover over the next few months will also be closely monitored. With real estate and gold giving subdued returns, investors have been looking at equities as an investment avenue. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time.

The markets seem to be consolidating above the 10000 NIFTY mark. Corporate performance & economic data which comes in H2FY18 will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus the general expectation is that H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Duel Benefits: How to save tax with Mutual Fund investments…

As we are nearing the end of the Financial Year there has been a spurt in activity with regard to tax saving investments. Investments are potentially your second income & security for a better future & thus should be planned carefully so that poor investment choices are not made. But all said it is human nature to wait till the last moment & then act in haste to complete your tax saving formalities. Thus many tax payers are currently looking for various options to save income tax u/s 80C. While there are several options, one of the attractive avenues is tax saving funds known as ELSS.
ELSS or tax savings funds provides tax savings u/s 80C upto a maximum of Rs.1,50,000/year. Tax saving MFs has the potential to give significantly higher tax free returns as compared to other investments like life insurance, tax saving FD, PPF, NSC etc; ELSS has a lock in period of 3 years as compared to 5-15 years for other products. Returns from ELSS could on an average be about 12-15% but could also be higher in better market conditions as compared to 7-9% for other investments. A point to note here though is that more than 65% of the portfolio consists of equity investments & thus these returns are not guaranteed.
Who should invest…
ELSS is advisable for investors with moderate risk taking ability wanting to invest in equities while also enjoying tax benefits on the same. This can be a good investment for a new investor as it will give them exposure to equity markets and the lock-in period will ensure they maintain fiscal discipline. One of the best ways to invest in equity fund is via SIPs as it negates the timing risk of investment and irons out market fluctuations as discussed by me in an earlier article. Before investing in any fund one should check the fund manager & fund’s performance and the portfolio of the fund.
What are the potential returns…
It has generally been seen that in the long run equity markets generate about 14-15% returns & thus we can safely assume that ELSS should give about 12-14% returns in the long run given that it may invest a part of its investments in debt funds also. But these returns are not guaranteed & could be higher or lower depending on overall market conditions. ELSS is mainly compared to NPS (National Pension Scheme) & ULIPs ( Unit Linked Insurance Plan). ULIP is an insurance plan & invests the premium paid (after various deductions & charges like agent commission & mortality charges etc) in either equity or debt & most ULIPs have a lock in period of 10 years or more. Thus the actual amount invested especially in initial years could be significantly lower than the premium paid. NPS, on the other hand, is a retirement solution and not exactly a savings option. It may have limited exposure to equity depending on the plan and lock-in period is generally extended till the investor’s retirement. Also, lump-sum withdrawal can be taxable.
To conclude…
Though ELSS has a mandatory lock-in period of 3 years, it is not compulsory to redeem the amount after maturity and the investor can continue with the investment as long as he wants & maybe wait till he gets favorable market conditions to withdraw the amount. As discussed in earlier articles, in the short run markets may decline and fluctuate but in the long run market returns mirror economic growth of the country which would be the cumulative of GDP growth & inflation. We expect this to be between 14-15% on an average going ahead. Among all tax saving investments this is the only investment which accounts for inflation in its returns. When one takes inflation into account, traditional investment routes are sub-optimal due to the fixed interest rates and the falling value of the rupee. Real returns post inflation would generally be in low single digits.

The best course of action is to check the amount you are left with of the Rs 1.50.000 Sec 80C limit at the start of the year, divide it by 12 and start a monthly SIP of the amount immediately.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’